IRS Rebuffed by Appeals Court on Mooting of Tax Collection Case

The IRS can’t kill a taxpayer’s lawsuit challenging her tax bill by withholding the taxpayer’s refund and applying it to the disputed liability, a federal appeals court ruled Friday.

The Third Circuit’s decision overturned the US Tax Court’s 2022 ruling that Jennifer Zuch’s case was moot after the IRS applied her 2018 refund to the remaining 2010 taxes it claimed she owed. The agency did so after Zuch filed her suit and then successfully moved for the court to dismiss her case.

“When Congress grants taxpayers the right to challenge what the Internal Revenue Service says is owed to the government, Congress’s will prevails,” said Judge Kent A. Jordan of the US Court of Appeals for the Third Circuit. “The IRS cannot say that such a right exists only under the circumstances it prescribes.”

Zuch said the IRS improperly applied 2010 estimated tax payments that were designated for her taxes to her then-husband’s liability after the pair submitted married-filing-separately returns. On appeal, she emphasized she hadn’t had an earlier opportunity to get a Tax Court ruling on the 2010 tax bill because the IRS hadn’t sent her a notice of deficiency, which offers a separate pathway into the court.

In dismissing Zuch’s case as moot, the Tax Court cited its 2006 decision in Greene-Thapedi v. Commissioner, ruling that it didn’t have jurisdiction to either determine a taxpayer overpaid or to order the IRS to issue a refund in a case challenging an IRS determination to levy under tax code Section 6330. Zuch’s case was likewise brought under that section after receiving an IRS determination to levy.

Greene-Thapedi‘s holding that a taxpayer may only challenge her underlying liability if there remains an unpaid tax or proposed levy is wrong, the Third Circuit said, because the Tax Court relied upon two nonprecedential cases where the taxpayer wasn’t actually asserting an ongoing liability challenge.

“The Tax Court’s own precedent since Greene-Thapedi suggests that the case was wrongly decided,” Jordan said. “Once the Tax Court has jurisdiction to resolve a disputed tax liability, it does not lose that jurisdiction simply because the IRS decides to satisfy the asserted liability with the taxpayer’s own funds.”

The Tax Court is a unique forum for taxpayers because it adjudicates cases without taxpayers having to first pay the IRS’s tax bill, unlike federal district courts and the US Court of Federal Claims.

Judge Cheryl Ann Krause joined Jordan’s opinion. Judge Stephanos Bibas joined in full except for its discussion of Green-Thapedi.

Agostino & Associates PC represented Zuch.

The case is Zuch v. Commissioner, 3d Cir., No. 22-2244, 3/22/24.